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on Industrial Competition |
| By: | Reisinger, Markus; Schnitzer, Monika |
| Abstract: | This paper develops a model of successive oligopolies with endogenous market entry, allowing for varying degrees of product differentiation and entry costs in both markets. Our analysis shows that the downstream conditions dominate the overall profitability of the two-tier structure while the upstream conditions mainly affect the distribution of profits. We compare the welfare effects of upstream versus downstream deregulation policies and show that the impact of deregulation may be overvalued when ignoring feedback effects from the other market. Furthermore, we analyze how different forms of vertical restraints influence the endogenous market structure and show when they are welfare enhancing. |
| Keywords: | Deregulation; Free Entry; Price Competition; Product Differentiation; Successive Oligopolies; Two-Part Tariffs; Vertical Restraints |
| JEL: | D43 L13 L40 L50 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6730&r=com |
| By: | Cabral, Luís M B |
| Abstract: | I consider a dynamic model of competition between two proprietary networks. Consumers die and are replaced with a constant hazard rate. Firms compete for new consumers to join their network by offering network entry prices (which may be below cost). New consumers have a privately known preference for each network. Upon joining a network, in each period consumers enjoy a benefit which is increasing in network size during that period. Firms receive revenues from new consumers as well as from consumers already belonging to their network. Using a combination of analytical and numerical methods, I discuss various properties of the equilibrium. I show that very small or very large networks tend to price higher than networks of intermediate size. I also show that, around symmetric states, the gap between the large and the small network tends to widen (increasing dominance) whereas the opposite is true (reversion to the mean) around very asymmetric states. |
| Keywords: | dynamic price competition; network effects |
| JEL: | L13 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6687&r=com |
| By: | Nocke, Volker; Peitz, Martin |
| Abstract: | In an intertemporal setting in which individual uncertainty is resolved over time, advance-purchase discounts can serve to price discriminate between consumers with different expected valuations for the same product. Consumers with a high expected valuation purchase the product before learning their actual valuation at the offered advance-purchase discount; consumers with a low expected valuation will wait and purchase the good at the regular price only in the event where their realized valuation is high. We provide a necessary and sufficient condition under which the monopolist's optimal intertemporal selling policy features such advance-purchase discounts. |
| Keywords: | advance-purchase discount; demand uncertainty; intertemporal pricing; introductory offers; monopoly pricing; price discrimination |
| JEL: | D42 L12 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6664&r=com |
| By: | Jozef Konings; Patrick Van Cayseele; Frederic Warzynski |
| Abstract: | In this paper, we estimate markup ratios using firm-level data according to the techniques developed by Hall (1986, 1988) and Domowitz et al. (1988) for the Dutch and Belgian manufacturing industry from 1992 to 1997, to determine whether competition policy affects the pricing behaviour of firms. Competition law was applied less toughly in the Netherlands until January 1998. We find evidence of large markup ratios in the manufacturing industry as a whole and in a lot of 2-digit industries. The markup ratio did not decline in Belgium following the creation of a national competition policy authority. However we show that the markup ratio is higher in the Netherlands than in Belgium in the whole manufacturing industry but also in most smaller subsets. In addition, the import penetration ratio positively influences the markup ratio in the Netherlands, meaning that imports do not discipline the industry. Together these findings support the hypothesis that competition is useful to correct allocative inefficiencies. |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ete:ceswps:ces9914&r=com |
| By: | Patrick Van Cayseele; Jozef Konings; Jan De Loecker |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ete:ceswps:ces0315&r=com |
| By: | INUI Tomohiko; KAWAKAMI Atsushi; MIYAGAWA Tsutomu |
| Abstract: | Going all the way back to Schumpeter (1934), economists have long discussed whether market competition stimulates innovation. To reconcile conflicting earlier empirical evidence, Aghion and Griffith (2005) developed a model showing that competition can have both a positive and a negative effect on innovation, depending on the degree of competition in the market. Following Aghion and Griffith's work, this paper empirically examines the effect of market competition - measured either by the Herfindahl Index or the Lerner Index - on productivity growth and R&D intensity using micro data for Japan's manufacturing sector. We found evidence of an inverted U-shaped relationship between competition and innovation when we use the Herfindahl Index as a measure of competition in the market. Especially for the period since 2000, the data lend strong support for the hypothesis of an inverted U-shaped curve. In addition, we examined the effect of new entrants on the innovative activity of incumbents. The results of our estimation using a regulation index as our measure of entry barriers suggest that the effect on incumbents' TFP growth depends on their technology level. When incumbents' technology level is close to the technology frontier in their industry, competition from new entrants induces these firms to make efforts to increase their productivity in order to escape from competition. On the other hand, such competition discourages innovation in firms far from the industrial technology frontier. |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:08012&r=com |
| By: | de Frutos, Maria-Angeles; Fabra, Natalia |
| Abstract: | Several regulatory authorities worldwide have recently imposed forward contract obligations on electricity producers as a way to mitigate their market power. In this paper we investigate how such contractual obligations affect equilibrium bidding in electricity markets, or in any other auction-based market. For this purpose, we introduce forward contracts in a uniform-price multi-unit auction model with complete information. We find that forward contracts are pro-competitive when allocated to relatively large and efficient firms; however, they might be anti-competitive otherwise. We also show that an increase in contract volume need not always be welfare improving. From a methodological point of view, we aim at contributing to the literature on multi-unit auctions with discrete bids. |
| Keywords: | antitrust remedies; discrete bids; electricity; Forward contracts; market power; multi-unit auctions; simulations |
| JEL: | G13 L13 L94 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6756&r=com |
| By: | Bert Willems |
| Abstract: | This paper studies the market power of generators in the electricity market when transmission capacity is scarce. We consider a simple world of two generators providing electricity to their consumers through a single transmission line. In the literature, different Cournot equilibrium concepts have been developed. This paper applies these concepts and explains the implicit assumptions on the behavior of the System Operator made in those papers. We show that these implicit assumptions are not realistic. For an alternative role of the System Operator, we solve the Cournot equilibrium and compare the outcome. Furthermore, we show that the axiomatic equilibrium concept of Smeers and Wei (1997) is linked with the model of Oren (1997) and can also be defined as a Nash Equilibrium. |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ete:ceswps:ces0024&r=com |
| By: | de Frutos, Maria-Angeles; Fabra, Natalia; Von der Fehr, Nils-Henrik M |
| Abstract: | Motivated by the regulatory debate in electricity markets, we seek to understand how market design affects market performance through its impact on investment incentives. For this purpose, we study a two-stage game in which firms choose their capacities under demand uncertainty prior to bidding into the spot market. We analyse a number of different market design elements, including (i) two commonly used auction formats, the uniform-price and discriminatory auctions, (ii) price-caps and (iii) bid duration. We find that, although the discriminatory auction tends to lower prices, this does not imply that investment incentives at the margin are poorer; indeed, under reasonable assumptions on the shape of the demand distribution, the discriminatory auction induces (weakly) stronger investment incentives than the uniform-price format. |
| Keywords: | electricity; investment; market design; regulatory reform; uniform price and discriminatory auctions |
| JEL: | D44 L10 L5 L94 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6626&r=com |
| By: | Chenghuan Sean Chu |
| Abstract: | In vertically differentiated markets, the effects of firm entry are contingent upon whether incumbent firms can respond to entry by adjusting product quality in addition to simply lowering prices. Using market-level data, I estimate a structural model of supply and demand for subscription television that takes into account the endogeneity of quality choice. Using counterfactual analysis, I decompose the effect of satellite entry on existing cable into two components: the conventional price response and the effect of endogenous quality adjustments (measured by changes in programming content). Consistent with the empirical observation that cable prices rose during the 1990s and early 2000s "in spite of" increasing competition, I find that raising both price and quality for the most comprehensive subscription package--i.e., competing "head-to-head"--is the rational response to entry by cable systems in markets with relatively homogeneous consumer types. Elsewhere, incumbents respond less aggressively and relegate themselves to being the low-end provider. When an entrant credibly commits to serving consumers with the highest preferences for quality, competition over both price and quality lowers the welfare gains due to entry, relative to pure price competition. In particular, head-to-head competition results in "crowding" of quality choices toward the high end of the market and inefficiently low product differentiation. In such cases, consumers with weak quality preferences may actually become worse off following entry. The evidence also suggests that the observed degradation of the lowest-quality cable tier in many markets during this time period--while commonly seen as an attempt to evade price regulation--may actually have been welfare-enhancing. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2008-12&r=com |
| By: | Anca Pruteanu-Podpiera; Laurent Weill; Franziska Schobert |
| Abstract: | Banking competition is expected to provide welfare gains by reducing monopoly rents and cost inefficiencies, favoring a reduction of loan rates and then investment. These expected gains are a major issue for transition countries, in which bank credit represents the largest source of external finance for companies. With the use of exhaustive quarterly data for Czech banks, this paper aims to provide evidence on the effects of banking competition in the Czech Republic. First, we measure the level and evolution of banking competition between 1994 and 2005. Competition is measured by the Lerner index on the loan market, using data on loan prices. The results do not show a clear-cut trend in the evolution of the Lerner index. Second, we investigate the relationship and causality between competition and efficiency. We perform a Granger-causality-type analysis. This supports the ‘banking specificities’ hypothesis, according to which heightened competition can lead to an increase in monitoring costs through a reduction in the length of the customer relationship and due to the presence of economies of scale in the banking sector, in this way reducing the cost efficiency of banks. Therefore, our results reject the intuitive ‘quiet life’ hypothesis and indicate a negative relationship between competition and efficiency in banking. |
| Keywords: | Banks, competition, efficiency, transition countries. |
| JEL: | G21 L12 P20 |
| Date: | 2007–12 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2007/6&r=com |
| By: | Michiel van Leuvensteijn; Christoffer Kok Sørensen; Jacob A. Bikker; Adrian A.R.J.M. van Rixtel |
| Abstract: | This paper analyses the impact of loan market competition on the interest rates applied by euro area banks to loans and deposits during the 1994-2004 period, using a novel measure of competition called the Boone indicator. We find evidence that stronger competition implies significantly lower spreads between bank and market interest rates for most loan market products, in line with expectations. Using an error correction model (ECM) approach to measure the effect of competition on the pass-through of market rates to bank interest rates, we likewise find that banks tend to price their loans more in accordance with the market in countries where competitive pressures are stronger. Further, where loan market competition is stronger, we observe larger bank spreads (implying lower bank interest rates) on current account and time deposits. This would suggest that the competitive pressure is heavier in the loan market than in the deposit markets, so that banks under competition compensate for their reduction in loan market income by lowering their deposit rates. We observe also that bank interest rates in more competitive markets respond more strongly to changes in market interest rates. These findings have important monetary policy implications, as they suggest that measures to enhance competition in the European banking sector will tend to render the monetary policy transmission mechanism more effective. |
| Keywords: | Monetary transmission; banks; retail rates; competition; panel data |
| JEL: | D4 E50 G21 L10 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpb:discus:103&r=com |
| By: | Hans Degryse; Steven Ongena |
| Abstract: | We review how technological advances and changes in regulation may shape the (future) geographical scope of banking. We first review how both physical distance and the presence of borders currently affect bank lending conditions (loan pricing and credit availability) and market presence (branching and servicing). Next we discuss how technology and regulation have altered this impact and analyse the current state of the European banking sector. We discuss both theoretical contributions and empirical work and highlight open questions along the way. We draw three main lessons from the current theoretical and empirical literature: (1) Bank lending to small businesses in Europe may be characterized both by (local) spatial pricing and resilient (regional and/or national) market segmentation; (2) Because of informational asymmetries in the retail market, bank mergers and acquisitions seem the optimal route of entering another market, long before cross-border servicing or direct entry are economically feasible; (3) Current technological and regulatory developments may to a large extent remain impotent in further dismantling the various residual but mutually reinforcing frictions in the retail banking markets in Europe. We conclude the paper by offering pertinent policy recommendations based on these three lessons. |
| Keywords: | geographical scope, banking, lending relationships, technology, and regulation. |
| JEL: | G21 L11 L14 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ete:ceswps:ces0408&r=com |
| By: | Martinez-Miera, David; Repullo, Rafael |
| Abstract: | A large theoretical literature shows that competition reduces banks' franchise values and induces them to take more risk. Recent research contradicts this result: When banks charge lower rates, their borrowers have an incentive to choose safer investments, so they will in turn be safer. However, this argument does not take into account the fact that lower rates also reduce the banks' revenues from non-defaulting loans. This paper shows that when this effect is taken into account, a U-shaped relationship between competition and the risk of bank failure generally obtains. |
| Keywords: | Bank competition; Bank failure; Credit risk; Default correlation; Franchise values; Loan defaults; Loan rates; Moral hazard; Net interest income; Risk-shifting |
| JEL: | D43 E43 G21 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6669&r=com |
| By: | Stijn Claessens; Neeltje van Horen |
| Abstract: | Familiarity with working in a specific institutional environment compared to its competitors can provide a firm with a competitive advantage, making it invest in specific host countries. We examine whether this notion of institutional competitive advantage drives banks to seek out specific markets. Using detailed, bilateral data of bank ownership for a large number of countries over 1995-2006 and using a first-difference model, we find that institutional competitive advantage importantly drives banks' location decisions. Results are robust to different samples and model specifications, various econometric techniques and alternative measures of institutional quality. This finding has some policy implications, including on the increased cross-border banking among developing countries. |
| Keywords: | foreign direct investment; international banking; institutions |
| JEL: | D4 E50 G21 L10 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:172&r=com |
| By: | O'Gorman, Catherine; Smith, Howard |
| Abstract: | Reducing fixed cost duplication - a common justification for concentrated market structure - motivated the US government to relax the number of radio stations a firm could operate in any local market. After deregulation the number of firms per market decreased. The implied cost saving depends on the per market fixed costs incurred by each firm. Using data from 140 markets we estimate upper and lower bounds to fixed costs using (i) an empirical model of gross profit and (ii) the assumption that the observed post-deregulation market structure is a Nash equilibrium. The estimates suggest that the efficiency savings were significant. |
| Keywords: | moment inequalities |
| JEL: | L10 L40 L82 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6699&r=com |
| By: | Fay Dunkerley; André de Palma; Stef Proost |
| Abstract: | In this paper we study the problem of a city with access to two subcentres selling a differentiated product. The first subcentre has low free flow transport costs but is easily congested (near city centre, access by road). The second one has higher free flow transport costs but is less prone to congestion (ample public transport capacity, parking etc.). Both subcentres need to attract customers and employees by offering prices and wages that are sufficiently attractive to cover their fixed costs. In the absence of any government regulation, there will be an asymmetric duopoly game that can be solved for a Nash equilibrium in prices and wages offered by the two subcentres. This solution is typically characterised by excessive congestion for the nearby subcentre. We study the welfare effects of a number of stylised policies by setting up a general model and illustrating the model using competition between airports as an example. The first stylised policy is to extend the congested road to subcentre 1. This policy will not necessarily lead to less congestion as more customers will be attracted by the lower transport costs. The second policy option is to add congestion pricing (or parking pricing (etc.) for the congested subcentre. This will decrease its profit margin and attract more customers. The third policy is acceptable for politicians: providing a direct subsidy to the remote subcentre, reducing its marginal costs. This policy will again ease the congestion problem for the nearby subcentre but will do this in a very costly way. |
| Keywords: | duopoly, imperfect competition, congestion, general equilibrium, airport competition |
| JEL: | L13 D43 R41 R13 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ete:ceswps:ces0610&r=com |
| By: | Bert Willems |
| Abstract: | Allaz and Vila (1993) show that the existence of futures markets increases the efficiency of markets in a Cournot setting. This paper looks at the efficiency effect of financial options in a similar framework. It shows that also the existence of financial options makes markets more efficient; though to a smaller extent than futures. This is particularly relevant for markets with market power and costly storage, like the electricity market. |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ete:ceswps:ces0414&r=com |
| By: | Matthias Kräkel; Petra Nieken; Judith Przemeck |
| Abstract: | We analyze a two-stage game between two heterogeneous players. At stage one, common risk is chosen by one of the players. At stage two, both players observe the given level of risk and simultaneously invest in a winner-take-all competition The game is solved theoretically and then tested by using laboratory experiments. We find three effects that determine risk taking at stage one - an effort effect, a likelihood effect and a reversed likelihood effect. For the likelihood effect, risk taking and investments are clearly in line with theory. Pairwise comparison shows that the effort effect seems to be more relevant than the reversed likelihood effect when takin risk. |
| Keywords: | Tournaments; Competition; Risk-Taking; Experiment |
| JEL: | M51 C91 D23 |
| Date: | 2008–04–03 |
| URL: | http://d.repec.org/n?u=RePEc:bon:bonedp:bgse7_2008&r=com |
| By: | Schivardi, Fabiano; Viviano, Eliana |
| Abstract: | The 1998 reform of the Italy's retail trade sector delegated the regulation of entry of large stores to the regional governments. We use the local variation in regulation to determine the effects of entry barriers on firms' performance for a representative sample of retailers. We address the endogeneity of entry barriers through local fixed effects and using political variables as instruments. We also control for differences in trends and for area-wide shocks. We find that entry barriers are associated with substantially larger profit margins and substantially lower productivity of incumbent firms. Liberalizing entry has a positive effect on investment in ICT. Consistently, more stringent entry regulation results in higher inflation: lower productivity coupled with larger margins results in higher consumer prices. |
| Keywords: | entry barriers; productivity growth; technology |
| JEL: | L11 L5 L81 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6637&r=com |
| By: | Martínez de Albeniz, Victor (IESE Business School); Vendrell, Josep M. (IESE Business School) |
| Abstract: | In this paper we consider the problem of a trader who purchases a commodity in one market and resells it in another. The trader is capacitated: the trading volume is limited by operational constraints, e.g., logistics. The two markets quote different prices, but the spread is reduced when trading takes place. We are interested in finding the optimal trading policy across the markets so as to obtain the maximum profit in the long-term, taking into account that the trading activity influences the price processes, i.e., market power. As in the no-market-power case, we find that the optimal policy is determined by three regions, where 1) move as much as possible from one market to the other; 2) the same in the opposite direction; or 3) do nothing. Finally, we use the model to analyze kerosene price differences between New York and Los Angeles. |
| Keywords: | commodity trading; price processes; inventory management; |
| Date: | 2008–01–07 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:iesewp:d-0728&r=com |